Kohl’s Corporation — FY2017 Form 10-K
Reporting-period note: The request identifies “2016 Q4,” but the filing is Kohl’s fiscal 2017 Form 10-K, for the 53 weeks ended February 3, 2018. It reports a 14-week fourth quarter. Fiscal 2016, the prior comparable year, ended January 28, 2017 and had 52 weeks.
Business context
Kohl’s operated 1,158 department stores in 49 states, its Kohls.com website, 12 FILA outlets and four Off-Aisle clearance centers. It sells apparel, footwear, accessories, beauty and home products through stores and digital channels. The company does not separately report store and digital sales. Its business is seasonal, with a large share of sales and income typically in the second half of the year.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $19.095 billion | $18.686 billion |
| Comparable sales | +1.5% | -2.4% |
| Gross margin | $6.919 billion; 36.2% of sales | $6.742 billion; 36.1% |
| SG&A | $4.512 billion; 23.6% of sales | $4.435 billion; 23.7% |
| Operating income, GAAP | $1.416 billion; 7.4% of sales | $1.183 billion; 6.3% |
| Net income, GAAP | $859 million | $556 million |
| Diluted EPS, GAAP | $5.12 | $3.11 |
| Operating cash flow | $1.691 billion | $2.153 billion |
| Capital expenditures | $672 million | $768 million |
| Free cash flow, company-defined non-GAAP | $881 million | $1.269 billion |
Excluding the $156 million in 2017 tax benefits, adjusted net income was $703 million and adjusted diluted EPS was $4.19. Management said adjusted EPS rose 11% from FY2016’s $3.76, which excluded $0.65 per share of 2016 impairment, store-closing and other costs. The 53rd week contributed approximately $170 million of sales and $15 million of net income, or $0.10 diluted EPS.
Fourth-quarter sales were $6.776 billion versus $6.205 billion; net income was $468 million versus $252 million, and diluted EPS was $2.81 versus $1.44. Fourth-quarter comparable sales increased 6.3%. The reported quarter included an extra week.
Gross-margin improvement reflected fewer promotional and permanent markdowns, partly offset by higher digital shipping costs. FY2017 SG&A increased in dollars but decreased as a share of sales. Operating cash flow fell mainly because of changes in accounts payable.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1.308 billion at year-end, versus $1.074 billion a year earlier. Working capital was $2.680 billion and the current ratio was 2.01, compared with $2.273 billion and 1.76.
- Long-term debt was $2.797 billion; capital lease and financing obligations totaled $1.717 billion. The company’s debt/capitalization ratio was 45.4%, and adjusted debt to EBITDAR was 2.54.
- Kohl’s reported a $1.0 billion unsecured revolving credit facility maturing in November 2022. It was in compliance with debt covenants at year-end; its covenant debt ratio was 2.50 against a maximum of 3.75.
- Long-term debt carried fixed interest rates. The filing lists $5.123 billion of future minimum operating lease payments and $13.898 billion of total contractual obligations, including debt, leases, interest and other obligations.
- FY2017 dividends totaled $368 million. The board subsequently approved an 11% increase to $0.61 per share quarterly. Management expected $300–$400 million of share repurchases in FY2018.
Changes, outlook and management commentary
FY2017 sales increased 2.2%, including the extra week, reversing FY2016’s 2.7% decline. Management attributed the comparable-sales recovery to higher average transaction values; transactions improved sequentially and turned positive in the fourth quarter but were slightly negative for the year. Home and Footwear were strongest; Women’s sales declined for the year, though trends improved each quarter.
Management’s FY2018 outlook was: net sales down 1% to up 1%; comparable sales up 0%–2%; gross margin up 5–10 basis points; SG&A up 1%–2%; depreciation and amortization of $960 million; net interest expense of $280 million; effective tax rate of 24%–25%; diluted EPS of $4.95–$5.45; and capital expenditures of $700 million. Guidance excludes the impact of adopting the new revenue-recognition standard.
Tax reform and a favorable state-tax settlement reduced FY2017 tax expense by $156 million in total, increasing EPS by $0.93. The tax-reform amount was a provisional estimate under SEC guidance and could change as the company completed its analysis. A separate state-tax settlement generated a $30 million pre-tax benefit. FY2016 included $186 million of impairment, store-closing and other costs, primarily related to 18 store closures and corporate realignment; FY2015 included a $169 million debt-extinguishment loss.
Key disclosed risks include changing consumer demand and inventory markdowns; intense price and digital competition; sourcing, tariffs and trade-policy exposure; higher merchandise, shipping and labor costs; execution of omnichannel and technology initiatives; seasonal and severe-weather effects; credit-card portfolio performance and funding costs; cybersecurity and data breaches; and legal or regulatory changes. Kohl’s reported no material legal proceedings. It identified no material off-balance-sheet arrangements. Management and the auditor concluded internal controls over financial reporting were effective, and the auditor issued an unqualified opinion on the financial statements.
Management announced CEO Kevin Mansell’s planned retirement effective at the close of the 2018 annual meeting; Michelle Gass was named CEO-elect and Sona Chawla president-elect.
Important facts for investors to verify
- Confirm the intended period: this filing covers FY2017 and includes FY2017 quarterly data, not a standalone FY2016 Q4 filing.
- Separate the 53rd-week contribution and tax benefits from recurring sales and earnings when comparing periods; review the company’s non-GAAP reconciliations.
- Track comparable-sales momentum, transaction trends, markdowns and shipping costs against management’s FY2018 guidance.
- Assess cash-flow conversion and working-capital movements, particularly accounts payable, alongside planned capital expenditures, dividends and buybacks.
- Review debt and lease obligations, covenant headroom, and the potential balance-sheet impact of the forthcoming lease-accounting standard.
- Monitor final tax-reform accounting, ongoing tax audits, and the operational, technology, sourcing and cybersecurity risks identified in the filing.